Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
9 Months Ended
Sep. 30, 2014
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2013 Annual Report on Form 10-K.
 
Recurring Fair Value Measurements
 
Our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. In determining the fair value of our partner’s interest as of September 30, 2014, we used a discount rate of 15.5%. The discount rate factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture. A significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments.  As discussed in Note 6, we estimated the fair values of our mortgage and other investing receivables based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments.  For our disclosure of debt fair values in Note 8, we estimated the fair value of our unsecured senior notes and exchangeable senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments.  Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.  Settlement at such fair value amounts may not be possible and may not be a prudent management decision.
 
For additional fair value information, please refer to Note 6 for mortgage and other investing receivables, Note 8 for debt and Note 9 for interest rate derivatives. 

COPT and Subsidiaries

The table below sets forth financial assets and liabilities of COPT and its subsidiaries that are accounted for at fair value on a recurring basis as of September 30, 2014 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
Description
 
Quoted Prices in
Active Markets for
Identical Assets(Level 1)
 
Significant Other
Observable Inputs(Level 2)
 
Significant
Unobservable Inputs(Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Marketable securities in deferred compensation plan (1)
 
 

 
 

 
 

 
 

Mutual funds
 
$
7,187

 
$

 
$

 
$
7,187

Common stocks
 
110

 

 

 
110

Other
 
203

 

 

 
203

Interest rate derivatives (2)
 

 
2,907

 

 
2,907

Warrants to purchase common stock (2)
 

 
192

 

 
192

Total Assets
 
$
7,500

 
$
3,099

 
$

 
$
10,599

Liabilities:
 
 

 
 

 
 

 
 

Deferred compensation plan liability (3)
 
$

 
$
7,500

 
$

 
$
7,500

Interest rate derivatives
 

 
2,236

 

 
2,236

Total Liabilities
 
$

 
$
9,736

 
$

 
$
9,736

Redeemable noncontrolling interest
 
$

 
$

 
$
18,436

 
$
18,436


(1) Included in the line entitled “restricted cash and marketable securities” on COPT’s consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets” on COPT’s consolidated balance sheet.
(3) Included in the line entitled “other liabilities” on COPT’s consolidated balance sheet.

COPLP and Subsidiaries

The table below sets forth financial assets and liabilities of COPLP and its subsidiaries that are accounted for at fair value on a recurring basis as of September 30, 2014 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
Description
 
Quoted Prices in
Active Markets for
Identical Assets(Level 1)
 
Significant Other
Observable Inputs(Level 2)
 
Significant
Unobservable Inputs(Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Interest rate derivatives (1)
 
$

 
$
2,907

 
$

 
$
2,907

Warrants to purchase common stock (1)
 

 
192

 

 
192

Total Assets
 
$

 
$
3,099

 
$

 
$
3,099

Liabilities:
 
 

 
 

 
 

 
 

Interest rate derivatives
 
$

 
$
2,236

 
$

 
$
2,236

Redeemable noncontrolling interest
 
$

 
$

 
$
18,436

 
$
18,436


(1) Included in the line entitled “prepaid expenses and other assets” on COPLP’s consolidated balance sheet.

Nonrecurring Fair Value Measurements
 
During the nine months ended September 30, 2014, we recognized impairment losses totaling $1.4 million primarily in connection with certain of our operating properties disposed in the current period.

During the nine months ended September 30, 2013, we recognized the following impairment losses:

for certain of our operating properties that served as collateral for a nonrecourse loan, we expected that the cash flows to be generated by the properties would be insufficient to fund debt service requirements on the loan. On December 23, 2013, we conveyed the properties to the lender to extinguish the loan. We recognized non-cash impairment losses of $10.4 million (all classified as discontinued operations) on these properties during the three months ended September 30, 2013 resulting primarily from the carrying amount of certain of these properties located in Colorado Springs, Colorado exceeding their fair value;
$14.8 million (all classified as discontinued operations and including $186,000 in exit costs) in connection with properties and land no longer aligned with our strategy that we sold, mostly in Colorado Springs; and
$5.9 million during the three months ended September 30, 2013 on two properties in the Greater Baltimore region that Management concluded no longer met our strategic investment criteria. After shortening our expected holding period for these properties during the period, we determined that the carrying amount of the properties would not likely be recovered from the cash flows from the operations and sales of the properties over the shortened period.

The table below sets forth the fair value hierarchy of the valuation technique used by us in determining the fair values of the properties (dollars in thousands):
 
 
 
 
 
 
 
 
 
Fair Value of Properties Held as of September 30, 2013
 
 
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
Impairment Losses Recognized (1)
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
Three Months
 
Nine Months
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
 
 
Ended
 
Ended
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
September 30, 2013
 
September 30, 2013
Assets (2):
 
 

 
 

 
 

 
 

 
 
 
 
Properties, net
 
$

 
$

 
$
142,702

 
$
142,702

 
$
21,888

 
$
30,940



(1) Represents impairment losses, excluding exit costs incurred of $186,000 for the three months and nine months ended September 30, 2013.
(2) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.

The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above as of September 30, 2013 (dollars in thousands):
Valuation Technique
 
Fair Value on 
Measurement Date
 
 Unobservable Input
 
Range (Weighted Average)
Contract of sale
 
$
110,499

 
Contract price (1)
 
(1)
Discounted cash flow
 
$
32,203

 
Discount rate
 
10.0% to 11.0% (10.9%)
 
 
 
 
Terminal capitalization rate
 
9.5% to 10.0% (9.7%)
 
 
 
 
Market rent growth rate
 
3.0% (2)
 
 
 
 
Expense growth rate
 
3.0% (2)

(1) These fair value measurements were developed as a result of negotiations between us and potential, or actual, purchasers of the properties.
(2) Only one value applied for this unobservable input.